Current Accounts Dynamics in new EU members: Sustainability and Policy Issues

No 2004 07 July uen Accoun Dynamic in new EU membe: Suainabiliy and Policy Iue Paolo Zanghiei

uen Accoun Dynamic in new EU membe: Suainabiliy and Policy Iue Paolo Zanghiei No 2004 07 July

uen Accoun Dynamic in new EU membe: Suainabiliy and Poliy Iue TABLE OF ONTENTS SUMMARY...5 ABSTRAT...5 RÉSUMÉ...6 RÉSUMÉ OURT...6. INTRODUTION...7 2. HOW IMPORTANT IS THE URRENT AOUNT?...8 3. STANDARD METHODOLOGY: HOW RELIABLE IS IT?...9 4. MODELLING THE URRENT AOUNT...4 5. POLIY ISSUES...2 6. ONLUSION...24 REFERENE...26 DATA APPENDIX...30 APPENDIX A: SHORT TERM AND LONG TERM DETERMINANTS OF THE URRENT AOUNT3 APPENDIX B: A SIMPLE INTERTEMPORAL MODEL WITH LIQUIDITY ONSTRAINTS AND HABIT FORMATION...32 TABLES...37 FIGURES...43 LIST OF WORKING PAPERS RELEASED BY EPII...45 3

uen Accoun Dynamic in new EU membe: Suainabiliy and Poliy Iue URRENT AOUNTS DYNAMIS IN NEW EU MEMBERS: SUSTAINABILITY AND POLIY ISSUES SUMMARY Mo of he new EU membe how lage and peien cuen accoun defici. If on he one ide uch a phenomenon i explained by caching up, on he ohe hand ecen expeience in emeging make how ha wide imbalance can igge balance of paymen and cuency cie. Theefoe cuen accoun uainabiliy i becoming a key policy iue fo hee counie, epecially given hei willingne o adop he Euo wihin a few yea. Thee i no a unanimou way o ae whehe a cuen accoun defici i uainable and each mehod ha eiou dawback. In hi pape he iue of cuen accoun uainabiliy fo new membe i ackled unde diffeen angle. Fi of all a imple accouning famewok baed on aumpion on long em gowh, eal inee and exchange ae, and capial inflow ae conideed. Then a an alenaive, a imple heoeical model of cuen accoun deeminaion unde boowing conain i developed and ued a bai fo an empiical eimaion of he deeminan of he cuen accoun. The eul ae hen ued o pojec he evoluion of exenal deb in he medium un. The main concluion eached ae he following: Oveall, cuen accoun balance do no eem o be unuainable, a he ong gowh poenial inue olvabiliy; Howeve Foeign Diec Invemen play a cucial ole, making he mainenance of lage inflow a key poliical pioiy; The conduc of puden fical policy i cucial in ode o mainain he exenal balance a a manageable level; The choice of when o join he Euozone and how o manage he exchange ae duing he aniion peiod hould be made aking he level of he exenal defici ino accoun. Pefeence hould be given o egime ha le eal adjumen play fully. ABSTRAT The uainabiliy of cuen accoun defici in he new EU membe i aeed uing diffeen mehod. Oveall he level of imbalance, alhough quie izeable in ome cae do no eem o be a poblem in he ho medium un. Howeve uch a concluion depend heavily on he oulook fo he inflow of foeign capial and on he puui of ound fical policy. Some implicaion fo govenmen aving and fo exchange ae policy ae deived. J.E.L.: F32, F33, F4, P2 Keywod: cuen accoun, new open macoeconomic, panel mehod, aniion Economie 5

EPII, Woking Pape No 2004-07 DYNAMIQUE DE LA BALANE OURANTE DANS LES NOUVEAUX MEMBRES DE L UE : SOUTENABILITE ET PROBLEMES DE POLITIQUE EONOMIQUE RESUME Beaucoup de nouveaux éa membe de l Union euopéenne fon face à de défici de balance couane impoan e peian. Si ce phénomène explique facilemen pa le aapage économique, le expéience écene de pluieu économie émegene monen que le dééquilibe exéieu peuven déclenche de cie de change e de balance de paiemen. La ouenabilié de la balance couane devien pa conéquen une queion de poliique économique fondamenale pou ce pay appêan à adope l Euo dan quelque année. Il n exie pa de méhode univoque pou évalue la ouenabilié de la balance couane e oue le appoche popoée ouffen d impoane limie. Dan ce aicle, la ouenabilié de balance couane de nouveaux membe de l Union euopéenne e évaluée de difféen poin de vue. Pemièemen on conidèe un imple cade compable, en appuyan u de hypohèe de coiance de long eme e de aux d inéê e de change. Enuie un modèle imple de déeminaion de la balance couane avec de conaine de liquidié e développé, e coniue la bae pou une eimaion empiique de déeminan du olde exéieu. Le éula en on uilié pou pojee la dee exéieue u l hoizon 2007. Le pincipale concluion on le uivane: Le défici de balance couane ne paaien pa êe inouenable, ca le fo poeniel de coiance aue la olvabilié de la dee exéieue. Le Inveiemen Diec de l éange (IDE) jouen un ôle cucial. Réui à maineni de flux élevé d inveiemen enan devien donc une pioié pou la poliique économique. La pouuie de poliique budgéaie pudene e fondamenale pou maneni le défici à un niveau géable. Le choix de la dae d adopion de l Euo e la geion du aux de change pendan la aniion ve la monnaie unique devaien pende en compe le niveau de défici exéieu. Le égime de change qui favoien l ajuemen éel on péféable. RESUME OURT La ouenabilié de la balance couane de nouveaux membe de l UE e évaluée pa de méhode difféene. Le niveaux de dééquilibe, pafoi aez élevé, ne paaien pouan pa êe inouenable dan le cou moyen eme. Néanmoin, cee concluion dépend è foemen de pepecive de flux de capiaux enan dan ce pay, e de la conduie de la poliique budgéaie. Finalemen quelque implicaion pou l épagne publique e le choix du égime de change on déivée. J.E.L.: Mo clé : F32, F33, F4, P2 Balance couane, nouvelle maco-économie ouvee, méhode de panel, économie en aniion 6

uen Accoun Dynamic in new EU membe: Suainabiliy and Poliy Iue URRENT AOUNTS DYNAMIS IN NEW EU MEMBERS: SUSTAINABILITY AND POLIY ISSUES. INTRODUTION Paolo Zanghiei # The welve enal and Eaen Euopean ounie, which eihe joined he Euopean Union in May 2004 o ae cheduled o do o a ealy a 2007, ofen how high cuen accoun defici, which ae omeime cloe o even beyond hoe value common widom and pa expeience aociae wih a high pobabiliy of a Balance of Paymen cii. A naual queion heefoe aie: ae hee defici uainable o do ome counie equie policy acion? A elaed queion i how he cuen accoun i likely o evolve in he medium em. The naual hoizon o conide i up o 2007/8 when, accoding o he mainained inenion, ome of he new EU membe will join EMU a well. The aim of hi pape i o povide a enaive anwe, by mean of hee diffeen mehod: an accouning execie and a nomaive analyi baed on an economeic eimaion of he deeminan of he cuen accoun, and a pojecion of exenal balance. The ole of capial inflow, and in paicula of Foeign Diec Invemen (FDI) i eed. The pape i ucued a follow. Secion 2 peen ome ylied fac abou exenal balance in EE, and hei elaion beween invemen, aving and fical balance. Secion 3 deal wih he impoance of he cuen accoun a a faco eponible fo cuency cie, and ummaie he poviion of he Maaich Teay. A fi aemen of he uainable level of cuen accoun defici, baed on a widely known accouning famewok, i peened in ecion 4, ogehe wih ome ciicim abou he mehodology. Secion 5 ummaie he empiical udie on cuen accoun. In ecion 6, panel eimaion of cuen accoun dynamic, baed on a imple ineempoal model, i pefomed. The eul ae hen employed o imulae he fuue pah of foeign deb accumulaion, given ome ealiic aumpion on gowh and fical policy. Secion 7 i devoed o he dicuion of wo impoan policy iue, namely he aving ae in New EU membe and he adopion of he Euo Secion 8 conclude. Table how non-ovelapping hee yea aveage of he aving, invemen and cuen accoun a aio o GDP. The zech Republic howed a ignifican cuen accoun defici along he econd half of he 90, a he apid anfomaion of he induial eco equied ong impo of capial good. A ignifican dop in oal aving (due mainly o govenmen defici) i eponible # ene d Eude Poecive e d Infomaion Inenaionale 9 ue Geoge Piad 7505 Pai zanghiei@cepii.f We will analye eigh of he en counie joining EU in 2004, i.e. zech Republic, Eonia, Hungay, Lavia, Lihuania, Poland, Slovak Republic and Slovenia, and Bulgaia and Romania, whoe cheduled acceion dae i 2007. We omi ypu and Mala due o hei mall ize and peculia economic ucue. 7

EPII, Woking Pape No 2004-07 fo i deeioaion in he la hee yea. A quick educion of he defici can be obeved in Hungay, whee a ong ecovey in aving educed he gap by moe han a half beween 994 and 2002, while he invemen aio emained boadly conan. Given he eal gowh popec, a highe level of defici would no be poblemaic. The ong inceae in invemen a he end of he 90 i eponible fo he apid deeioaion of he cuen accoun in Poland, whee a dop in aving in he la hee yea can alo be obeved. The exenal defici widened conideably in he Slovak Republic afe 997, puhed by boh an inceae in invemen (which lowed down in he la hee yea) and by a mooh decline in oal aving. Finally, Slovenia ha viually no cuen accoun defici. Tuning o he Balic ae, we obeve ha Eonia exenal defici ha alway been a dangeou level and ha ecenly dopped o aound 2% of GDP a a conequence of one off faco bu alo ong domeic demand and he aciviy lowdown of Eonia main ade pane. Lihuania how a ong deeioaion duing he 997-99 peiod due o a uained fall in aving. The gap ha naowed in he mo ecen peiod due o an inceae in aving (mainly public) and a dip in he invemen aio: howeve he likely pick up in domeic demand i likely o widen he defici. The big uge in invemen i finally he main eponible fo he apid and peien widening of he defici in Lavia. Given he engh of domeic demand uch a defici i no likely o hink in he nea fuue. Bulgaia uffeed a quick deeioaion of i exenal balance beween 2000 and 2002, a a conequence of apid economic developmen following he 996-97 banking cii: he invemen boom ha been mached by a maked deeioaion in oal aving. On he conay Romania how a able defici. All in all, we can conclude hi bief analyi by aying ha cuen accoun poiion in new EU membe do no how a homogeneou paen neihe in em of he level of he defici neihe in i dynamic no in i diving foce. 2. HOW IMPORTANT IS THE URRENT AOUNT? The impoance of cuen accoun imbalance a a waning ignal of cuency cii ha neve been undipued. One of he mo impoan policy implicaion of he ineempoal model of cuen accoun i ha, a long a defici ae ceaed by inceaing invemen, hee hould no be a caue of concen, a he building up of exenal deb will be epaid eaily hank o inceaed gowh. The only impoan vaiable ha hould be in check i govenmen defici. Such a view of he cuen accoun defici ha been named Lawon Docine, afe he fome Biih hancello of he Excheque, Nigel Lawon, who fi popoed i in he 80. Howeve, he equence of deb and balance of paymen cii occued in he la weny yea howed ha uch a heoy i eiouly flawed 2. Anecdoal evidence how 2 See Reien (998) and Edwad (2002) fo a houghou dicuion of he pifall of he Lawon Docine. 8

uen Accoun Dynamic in new EU membe: Suainabiliy and Poliy Iue ha a widening (even hough no neceaily lage) of he cuen accoun defici i almo alway peen befoe an exchange ae cii (ee fo example oei, Peeni and Roubini (998) and Radele and Sach (2000) on he Aian ii). The impoance of he cuen accoun i wineed by i widepead ue in ealy waning indicao of cuency cie 3. Fo example Aziz e al (2000) y o find he macoeconomic and financial condiion common o financial cie in he 975-97 peiod. They find ha a lage exenal defici (poibly accompanied by a fical defici) i cloely linked o balance of paymen cie, nomally aociaed wih banking cie. Thi eul i confimed by Kamin e al. (200), who find ha lage imbalance do no conibue much o he aveage pobabiliy of a cii, bu conibue lagely o he eimaed pobabiliy duing acual cii yea. While he building up of vulneabiliy i moly due o inenal imbalance (e.g. inflaion, cedi gowh, fical defici), exenal hock and imbalance ae ciical in iggeing he cii. Büggemann and Linne (2002) eimae an ealy waning indicao fo new EU membe, Ruia and Tukey. Alhough he cuen accoun i no explicily ued a an explanaoy vaiable, hey found ha vaiable cloely linked o i uch a impo and expo gowh and exenal deb, a well a fical defici, have a ong pedicive powe. Uing a diffeen mehodology, Edwad (2004) how ha he pobabiliy of expeiencing an abup cuen accoun eveal i linked o he ize of he cuen accoun defici and he level of exenal deb. The Maaich Teay (a. 3A) include a uainable balance of paymen among he guiding pinciple ha EU counie mu follow in eing hei economic policie. Lae on (a 09j) i ae ha duing he econd age of ERM (ERM-II) a couny expeiencing a udden balance of paymen cii, unde ceain condiion, can ake ome poecive meaue, povided ha hey caue he lea poible diubance in he funcioning of he common make. Finally, he iuaion and developmen of he balance of paymen on cuen accoun i included a an acceoy cieion o ae a couny eadine o join he economic and moneay union. Thee poviion ae obviouly ahe vague, howeve, a look a he vaiou epo on new EU membe (ee, fo example, Euopean ommiion, 2002) how ha exenal balance ae one of he mo cloely wached vaiable. 3. STANDARD METHODOLOGY: HOW RELIABLE IS IT? Following Fenkel and Razin (997) wo diffeen, bu ineelaed concep can be diinguihed: a couny olvency and cuen accoun uainabiliy. An economy i aid o be olven if he peen dicouned value of fuue ade uplu i equal o cuen exenal indebedne. Such a definiion i obviouly difficul o apply a i elie on fuue even o policy deciion, wihou giving any hin abou hem. Thi lead o he definiion of uainabiliy. A cuen accoun i uainable if he coninuaion of he cuen govenmen policy ance and pivae eco behaviou ae no going o enail a 3 Recen uvey of hee model can be found in Edon (2003) and Abiad (2003). 9

EPII, Woking Pape No 2004-07 daic policy hif (uch a a fical conacion) o lead o a cuency o balance of paymen cii. Of coue uch a definiion need o be complemened by a benchmak level fo he cuen accoun. Moeove, in ode o ae he uainabiliy of he defici, he ouce of i mu be aken ino accoun. A defici ceaed by a educion in aving i clealy moe woying han anohe ceaed by a uge in invemen, which inceae fuue gowh and abiliy o epay. In ode o have an aemen of cuen accoun uainabiliy, a benchmak value i needed. The Inenaional Moneay Fund ha developed ove he yea a mehodology o aive a a quaniaive meaue of uainabiliy, baed on eveal macoeconomic indicao 4, which a he ame ime povide an indicaion of exchange ae mialignmen. Such an appoach i cloely linked o he Fundamenal Equilibium Exchange Rae (FEER, ee, fo example, Williamon, 994) one. I coni of deemining fi he cuen accoun poiion ha would exi in he long un given he cuen level of he exchange ae once he empoay effec of pa level of aciviy have been abobed by he economy, o in ohe wod, he economy opeae a a nomal level of capaciy uiliaion. Thi undelying meaue of he cuen accoun i hen compaed wih a meaue of uainable balance, which would be financed by nominal capial flow auming ha he couny unde inveigaion and i ade and financial pane have low inflaion and opeae a a eaonable ae of capaciy uiliaion. The following ep imply finding a level of he effecive eal exchange ae ha equae he wo definiion of balance decibed above, and heefoe deive he neceay adjumen. Howeve, hi mehodology implie oo heoic aumpion abou he eady ae value of he main economic vaiable, and, given he peculia condiion of he counie unde analyi, i pobably no vey eliable. Anohe way of eing fo uainabiliy, boowed fom he public finance i o check if he cuen accoun follow a aionay poce. Thi would mean ha in he long un he ineempoal budge conain linking aving and invemen i epeced. oakley e al. (996) apply hi concep o OED counie and link hei finding o he Feldein- Hoioka puzzle. Such an appoach i obviouly no feaible fo he economie unde analyi due o he ho ime pan conideed. Finally, Milei-Feei and Razin (996) have developed a imple accouning mehodology in ode o calculae he uainable level of he cuen accoun defici. They define i a he level a which exenal deb i abilied a he obeved level, o ha he couny ineempoal budge conain i epeced. The cuen accoun ideniy can be ewien, ecalling ha he cuen accoun poiion coepond o he vaiaion in he ock of foeign ae, a p * F p * * ( Y G I ) i p F * F p () 4 A moe deailed decipion of hi mehodology can be found in Iad e al. (200). 0

uen Accoun Dynamic in new EU membe: Suainabiliy and Poliy Iue whee F i he ock of ne foeign ae, denominaed in foeign good,, p and p* he nominal exchange ae, he domeic and foeign GDP deflao, Y,,G,I ae eal GDP, pivae and govenmen conumpion and invemen. The ade balance (TB) i he diffeence beween GDP and expendiue. Dividing boh ide by nominal GDP and eaanging, one obain f f [ ( )] * b f ε γ γ ε γ ε y (2) whee lowecae lee indicae he aio of he vaiable o nominal GDP,γ i he ae of eal gowh and ε he ae of eal appeciaion of he domeic cuency. Thi expeion ae ha he dynamic of foeign ae accumulaion i diven by he ade balance and by a em popoional o he exiing ae ock, ha inceae wih wold eal ae and deceae wih eal appeciaion and gowh. If he economy i a he eady ae, conumpion (boh public and pivae), invemen and he ock of foeign ae ae conan a a facion of GDP. Fom hi expeion, calculaed a he eady ae, we can obain he level of ade uplu a couny mu have in ode o keep he exenal deb o GDP aio conan, i.e. f f f. b i c g f ( * ε γ ) (3) Doiy and Hevé (2003) modify hi fomula in ode o conide he fac ha a conideable pa of hee counie exenal defici i financed by an almo non-deb ceaing inumen uch a FDI 5. Thi i no o ay ha hi i an aboluely ikle fom of financing he defici. Alhough hei volailiy i fa malle han ha of ohe fom of invemen (Sano and Taylo,999), FDI inflow could expeience abup op, a in he cae of Ruia in he afemah of he 998 cii. If FDI i aken ino accoun, he uainable cuen accoun a a pecenage of GDP can be wien a. ca f ( * γ ) fdi ε (4) whee fdi i he aio of ne FDI and ohe inflow uch a EU anfe o GDP. The implifying (and pobably queionable) aumpion of no feedback of FDI flow on gowh ha been adoped. 5 Even if he ock of FDI doe no coun fo he foeign deb one, he flow of epaiaed pofi can be a ubanial pa of he cuen accoun defici and hei flucuaion caue enion o he exenal balance.

EPII, Woking Pape No 2004-07 In wha follow, hi fomula i applied o he en counie unde analyi, exending he wok of Doiy and Hevé o a lage ample of couny and a longe ime pan. Of coue a numbe of aumpion mu be made, wih heavy implicaion on he eul. The equilibium level of exenal deb i aumed o be he aveage ove he la hee available yea. The aveage eal inee ae i he lae available figue fo long ae, deflaed by pivae conumpion deflao gowh. oncening eal exchange ae behaviou, he aumpion i ha he govenmen will le he well-known Balaa Samuelon effec play i full ole. In ohe wod, no pecific fical and moneay policie will be implemened in ode o couneac he naual endency o eal appeciaion, due o he izeable diffeence in poduciviy gowh beween adable and non adable eco. Such an aumpion migh be conideed quie ong, epecially if one ake ino accoun he fac ha eveal counie have expeed hei wih o join he Euo a oon a poible and, moe impoanly, a quick EMU eny will almo auomaically enail he acceion o he econd age of he ERM, which pecibe a limied band o exchange ae flucuaion. 6 Howeve he agumen pu fowad by De Gauwe and Schanbl (2003) and Buie and Gafe (2002), i followed hee ha i he cuen /-5% flucuaion i wide enough o accommodae he effec of elaive poduciviy gain. The pojecion of he eal exchange ae ae obained by a vey imple calculaion of he Balaa Samuleon effec. I can be hown (ee De Gauve and Skudenly, 2002, fo a ecen applicaion) ha he diffeence in he ae of inflaion beween couny i and couny j (coeponding o he vaiaion in eal exchange ae) i equal o p p i j a a ( qi q j ) ε whee q i poduciviy gowh (povided by eal pe capia income gowh) and a i he hae of non adable good in he economy. Fo he empiical implemenaion inflaion diffeenial vi-à-vi he Euopean Union,(whee inflaion i aumed o be 2%) have been compued. The hae of non-adable i fixed a 70% fo boh EE and EU counie. 7 (5) 6 I i impoan o bea in mind ha he conain o inflaion bind ju in he ERM-II age, and vanihe once a couny ha joined EMU. 7 Recen pape (Halpen e Wyploz (200), De Boeck an Slok (200) and Buie and Gafe (2002) peened ome eimaion of he end in eal appeciaion: hei eimae on he aveage annual ae of appeciaion ange beween.5 and 4.0%. I hould be eed ha hee value ae ju a mean aco counie, a hey ae obained uing panel o co ecion mehod, and heefoe hide he izeable diffeence in eal appeciaion beween counie. 2

uen Accoun Dynamic in new EU membe: Suainabiliy and Poliy Iue Gowh pojecion fo he zech Republic, Hungay, Poland, Slovakia, Slovenia, Eonia, Laiva and Lihuania ae he aveage ove 2003-2008 peiod of Global Inigh pojecion. Fo Bulgaia and Romania pojecion made by Wagne and Houlkova ae ued 8. Finally, in ode o pojec fuue FDI inflow, wo pola cae and anohe cenaio in which FDI and EU fund ae fixed a 4% of GDP ae conideed. In he fi cae i i aumed ha FDI ae diven by pivaiaion only, and ha he inflow i bound o dy up once he ale of ae paicipaion i ove. Alenaively, in he medium em, FDI flow, a a aio o GDP will abilie a hei aveage value of he la hee yea. The figue ued in hi ecion hould be een a pola cae, and he ue developmen, hould lie omewhee in he middle. The aumpion undelying he pojecion execie ae ummaied in Table 3. Table 4 how he calculaed uainable level of cuen accoun unde he hee diffeen cenaio, he aveage obeved cuen accoun fo he 2000-2002 peiod i added a a efeence. Taken lieally, he eul obained unde he (admiedly quie unealiic) aumpion of a udden op in FDI flow would imply ha fo mo of he counie he cuen level of exenal defici i no uainable and ome meaue mu be aken in ode o avoid a cii. Moe ealiically hey how he quaniaive impoance of hi fom of financing he defici. If we adop he abiay hehold of 4% of GDP fo fuue FDI flow, we can noice ha, he obeved cuen accoun defici appea o be uainable, he only excepion being counie uch a Lavia and Poland, budened by quie a high eal inee ae and below aveage gowh. Finally, unde he aumpion ha he obeved level of FDI flow will be kep in he medium un, almo all he counie could opimally have a much highe level of exenal defici. Anyway how ue can one be ha FDI will keep flowing in a he cuen level, epecially afe he maive pivaiaion poce come o an end? And, equally impoan, even hough one doe no believe o fixed level of exenal defici beyond which a ed ligh flahe (Milei-Feei and Razin, 996), i i nevehele difficul o believe ha ome counie could have no ouble financing a defici in exce of 5% of GDP fo he medium un. All in all, hi mehod epeen a imple and heoeically conien way of eimaing a couny uainable level of exenal imbalance, and ha been ued eveal ime by he 8 They eimae gowh and convegence equaion fo cuen EU membe and ue hem o compue implied gowh ae fo EE counie. The deciion no o ue hioical value fo hee counie i moivaed by he fac ha he widening gap in pe capia income hee economie expeienced duing he 90 i no likely o coninue once hey join EU, a wineed by peviou enlagemen expeience. Given hei limied economic ize and he engh of he ade link, i i vey likely ha EE will convege o he EU boh in economic and yemic em. Thu he paen of gowh hown by exiing EU membe in peviou decade offe a convincing model o pojec EE convegence. They eimae gowh egeion fo he peiod 960-998 uing a panel of fa gowing EU membe (Spain, Pougal, Ieland and Geece) and hen plug in value fo he Eaen Euopean ounie. Seveal hypohee ae conideed, baed on diffeen gowh expeience, and he eade i efeed o he oiginal pape fo deail. 3

EPII, Woking Pape No 2004-07 IMF in i couny aemen, (ee fo example i 200 couny udy on Mexico). Howeve, ome of i baic aumpion make i omewha unfi o analye he EE cae. Fi of all he model aume ha he obeved level of exenal deb i he uainable one. A quick glance a he exenal deb of new EU membe (Table 5) how ha, on aveage and wih he noable excepion of Bulgaia, hi level i no vey high. Theefoe, given hei invemen need and gowh popec, i i likely ha, fo ome counie, a fuhe inceae in hei indebedne will no igge any cii 9. Secondly, he economy i aumed o have eached he eady ae. Thi i obviouly oo ong an aumpion fo hee economie who have expeienced oughly en yea ago a big bang in he economic ucue, and he obeved invemen (of conumpion) o GDP aio ae bound o vay a lo in he medium em. Thi lead o ea he eul obained wih hi mehodology a a fi appoximaion of wha he uainable level of cuen accoun could be. A imple and pobably moe ivial, definiion of uainabiliy i he following: a cuen accoun poiion i uainable a long a foeign inveo ae willing o finance i. In he ligh of he ecen financial cie in emeging make i hould be added ha he qualiy of he ouce of financing mae a lo: a high pecenage of ho em deb inceae he pobabiliy of udden capial ouflow leading o a cii. I i almo unanimouly ecognied ha Foeign Diec Invemen ae by fa he ue fom of exenal financing. Thu a vey imple way o check fo uainabiliy i o ee how much of he defici i financed by FDI. Table 2 how he diffeence beween ne FDI flow and cuen accoun defici (in pecenage of GDP) fo he la five available yea. We can ee ha, een unde hi angle, exenal uainabiliy doe no eem an iue fo mo of he counie. On he conay he iuaion of Eonia and Hungay ha woened apidly. Whehe inflow can be kep in he medium un i obviouly a key policy queion. 0 4. MODELLING THE URRENT AOUNT 4.. A quick eview of he lieaue Fom a heoeical poin of view, he andad efeence fo cuen accoun analyi i he ineempoal appoach developed in he la weny yea o o and ynheied by Obfeld and Rogoff (995,996) and Razin (995). 9 Moeove, a poined ou by Reinha e al (2003), i i difficul o idenify a clea cu elaion beween he level of he exenal deb and he occuence of a cii. 0 A much moe poiive view i he one by Boei e al. (2002), who claim ha EU eny migh double FDI inflow. Of coue an analyi of FDI flow o new EU membe i beyond he cope of hi pape. Empiical analye can be found in Bevan and Ein (2000) Gaibaldi e al. (200), Buch e al.(200) and Kinohia and ampo (2003). 4

uen Accoun Dynamic in new EU membe: Suainabiliy and Poliy Iue On he empiical fon, hinn and Paad (2003) povide a compehenive analyi of he medium em deeminan of he cuen accoun, uing a panel of 89 induial and developing counie ove he 977-995 peiod, hough panel and co ecion echnique. Thei aim i no o diciminae among he compeing heoeical model, bu ahe o povide a e of ylied fac upon which a heoy can be buil. Thei main finding ae ha govenmen budge balance, iniial foeign ae poiion and indicao of financial deepening ae poiively coelaed wih cuen accoun. Demogaphic vaiable uch a he dependency aio have a ong, negaive impac on he cuen accoun. Tem-of-ade volailiy (ued a poxy of macoeconomic unceainy) i poiively coelaed o he exenal balance in developing counie. Agen may end o ave moe in ode o mooh conumpion in he face of volaile income flow, and he abiliy of a couny o un a lage cuen accoun defici can be hampeed by high em of ade volailiy making inenaional inveo unwilling o pu money ino i economy. Ohe vaiable uch a openne o ade, meaue of capial conol do no eem o have ignifican effec. They alo find no evidence in favou of he age of developmen hypohei, i.e counie whoe pe capia GDP i cloe o ha of induialied counie un lowe exenal defici. Uing a imila appoach aldeon e al. (2002) udy he deeminan of cuen accoun defici in 44 developing counie fo he peiod 966-95, focuing on he ho-em dynamic and employing moe ophiicaed economeic echnique. They find ha inceae in pivae and public aving have a modeae favouable impac on he cuen accoun, ha domeic oupu gowh end o woen he exenal balance (indicaing ha domeic gowh inceae invemen moe han aving), ha ade openne end o ceae bigge defici, pobably due o he fac ha a lage adable eco indicae a bee epaymen capaciy. 4.2. A Theoeical Model and Empiical eimae fo EE Thi ecion peen he eul of an economeic udy of he deeminan of cuen accoun poiion fo he en counie analyed. Following hinn and Paad (2000) and Aleina e al. (999), he long em and ho em deeminan of he cuen accoun ae modelled epaaely. In he fi ep, he ho em dynamic i modelled by panel egeion, uing moe volaile vaaible. Then he he eidual ae aveaged aco ime in ode o ge a o of couny fixed effec, oughly epeening he hae of cuen accoun vaiabiliy no explained by ho em deeminan. Thee fixed effec ae hen ued in a co ecion egeion whee le volaile vaiable ae employed a dependen vaiable Appendix A povide moe deail on he pocedue. 4.2. A imple heoeical model In ode o idenify he explanaoy vaiable fo he ho-em pecificaion, a imple ineempoal model of cuen accoun deeminaion, wih habi peience and liquidiy conain developed by Gube (2002) and Buièe e al (2004) wa ued. I i fully illuaed in Appendix B. 5

EPII, Woking Pape No 2004-07 6 onide a mall open economy facing a conan wold ae. Oupu i exogenou. Thee ae hee kind of agen, he govenmen an wo ype of conume. A facion ha no acce o he cedi make and heefoe conume i dipoable income: hee ae labelled Non Ricadian conume. The ohe (-) Ricadian conume behave like in he andad ineempoal model, bu hei choice ae influenced by habi fomaion à la Abel (990). Uiliy doe no depend ju on peen conumpion, bu alo on pa one. Aggegae pe capia conumpion i heefoe given by R NR (6) Fo non-ricadian conume, he excluion fom capial make implie ha pe capia conumpion i imply he diffeence beween oupu invemen and axe (aumed o be lump-um). NR T I Y (7) Ricadian conume chooe he pah of pe capia conumpion olving R R D D E Max 2 2 ϕ β (8).. R D R I T Y F F Whee F define pivae eco ne foeign ae poiion in pe capia em: hi i he only mean agen have o mooh conumpion, a hey do no conide govenmen deb a financial wealh (Bao, 974). The oluion of (8) yield he equaion fo conumpion of Ricadian agen (ee Appendix B fo he deivaion) R I T Y E F (9) See ampbell and Mankiw (99)

uen Accoun Dynamic in new EU membe: Suainabiliy and Poliy Iue Plugging (9) and (7) ino (6), he equaion fo oal pe capia conumpion i obained. ( Y T I ) ( ) ( ) ( ) F E Y T I (0) The govenmen budge conain i B G G ( ) B T G (0) Whee B G i govenmen ne foeign ae. The oal pe capia ne foeign ae poiion i given by he um of pivae and govenmen ne ae. Recalling ha only Ricadian conume hold ae, we have. G ( ) F B B The cuen accoun i a uual defined a he vaiaion in he ock of ne foeign ae, which i equivalen o he diffeence beween naional aving (he um of GDP and claim on foeign ae minu pivae and public conumpion) and invemen. A B B B Y G I () i fo eae of expoiion, define ne oupu a he diffeence beween GDP, invemen and public conumpion NO Y I G I can be hown (ee appendix B) ha he equaion decibing he cuen accoun i A G ( ) A T B G _ NO ( ) NO E NO (2) whee a ba ove he vaiable indicae i pemanen value, i.e. he conan level having he ame peen value a he vaiable ielf 2. Wha (2) ae i ha he cuen accoun depend on i lagged value, on govenmen budge balance, on he inceae in ne oupu and on i unexpeced deviaion fom i pemanen value. uen accoun peiency i due o pivae conumpion being paially deemined by i pa value. The influence of govenmen balance (he o called win defici hypohei) i explained by he fac ha, due o cedi conain, a facion of conume i unable o mooh unexpeced change in axe o govenmen conumpion, 2 Moe peciely he given he vaiable X, i peen value X i peen value i defined a X X, ee Obfeld and Rogoff (996) chp 2 fo moe deail. 7

EPII, Woking Pape No 2004-07 which heefoe affec he cuen accoun. Finally change in ne income have a poiive effec on he exenal balance a i change (being expeced o no) paially anlae ino highe aving. Noe ha in hi model i i no poible o ay wha ae he oveall effec of an eaing of cedi conain. Moe developed financial make could incenive aving on he one hand, bu alo make boowing eaie. Thi i ulimaely an iue o be eaed empiically. Summing up, he vaiable o be ued in he ho em equaion ae ne oupu, he govenmen balance and ome meaue of financial developmen: a i i common in he gowh lieaue I ue he aio beween boad money (M2) o GDP. Domeic cedi /GDP aio wa ued a an alenaive giving imila eul. The diffeence beween ealied ne oupu and i pemanen value i appoximaed by uing he eul of a egeion of ne oupu on a conan and a linea end. 4.2.2 Empiical Reul An unbalanced panel of annual obevaion fo he en counie unde analyi 3 wa ued fo he eimaion. The eie a beween 990 and 994 and all end in 2002 o 2003. The fi age egeion employ andad panel echnique, and andad eo ae coeced fo heeochedaiciy: uing lagged value of he cuen accoun in ode o capue peiency pevened me fom uing fixed effec eimaion, a i would yield inconien eimae, ee Nickel (98). Moeove, he limied numbe of obevaion made i impoible o ue moe advanced echnique, which can accoun fo he poenial endogeneiy of ome explanaoy vaiable, uch a panel GMM eimaion. The eul fo he ho em dynamic ae peened in Table 6. The ign of he vaiable ae in accodance wih he model and he coefficien ighly eimaed. The effec of govenmen defici i ignifican and omehow lowe han he one found by ohe udie on cuen accoun o aving, uch a Edwad (995) on developing economie and Scooen and Sephan (2002) on aniion economie. A pecenage poin woening in govenmen balance bing abou nealy 0. poin deeioaion in he defici, a public diaving ae no fully compenaed by highe pivae aving, due o liquidiy conain and conumpion ickine. The poiive coelaion beween he inceae in income and he cuen accoun i omehow conien wih he finding of hinn and Paaad (2003) and Blanchad and Giavazzi (2003) fo developed counie. The ong and negaive impac of financial deepening i conien wih wha found by Blanchad and Giavazzi (2003), indicaing ha developmen in he financial yem mainly affec boowing co and heefoe invemen. Tuning o he co ecion egeion fo he long un deeminan (able 7), only old dependency aio, defined a he pecenage of populaion aged moe han 65 yea o he 3 Bulgaia, zech Republic, Slovak Republic, Hungay, Poland, Slovenia, Eonia, Lavia, Lihuania and Romania. 8

uen Accoun Dynamic in new EU membe: Suainabiliy and Poliy Iue populaion beween 5 and 65, and exenal deb o GDP aio uned ou o be ignifican 4. The ign of he dependency aio i e he one indicae by andad life-cycle heoy in ha an olde populaion ha lowe aving. The poiive link wih exenal deb can be inepeed a foeign ae poiion being a o of conain limiing he ize of he defici. The policy implicaion of hee eul ae eveal. The fi one i ha caching up will end o educe exenal imbalance ove ime, bu a he ame ime, he eaing of he boowing conain faced by economic agen will counebalance hi end. Economic policy will have heefoe o be vey cauiou: moeove, in he ho un, he izeable win defici effec enghen he cae fo diciplined fical policy, epecially fo hoe counie willing o join quickly he ERM-II mechanim in ode o adop he euo a oon a poible. In he long un fuhe peue on he cuen accoun ae likely, a in mo of he counie unde exam old dependency aio i e o ie apidly. The imple economeic model ju decibed can be ued o pojec he fuue pah fo exenal deb, fom ha ome concluion on uainabiliy deived, given ome aumpion on he behaviou of he exogenou vaiable and on capial flow. 4.3. Pojecion A aed in Secion 3, a cuen accoun balance i aid o be uainable if, given he pojeced pah of ome key macoeconomic vaiable, i abilie he ock of exenal deb a he cuen level. The imple economeic model ju developed can hen be ued in ode o have a ough idea of he fuue developmen of hee counie ock of exenal deb up o 2007. To hi end, a foecaed gowh pah and an eimae of he fuue fical policy ance ae needed, ogehe wih fuhe aumpion on financial deepening, a well a aumpion on ne inflow of foeign capial. Befoe uning o he aumpion made and he eul obained wo waning ae eenial. Fi of all, i i impoan o ecall ha he economeic model i vey imple and he fac ha he panel mehodology foce o aveage ou counie chaaceied by a high heeogeneiy. Second, uch a model can give a hin abou he uainable level of cuen accoun only if we eain he definiion of uainable a he level abiliing foeign deb. Real pe capia ne oupu i aumed o gow a he ame peed a eal GDP. Fo 2004 and 2005 I ue he Sping 2004 Foeca made by he Euopean ommiion whee available. Fo Romania and Bulgaia I ue Globalinigh foeca. Afe ha dae he eul by Wagne and Houlkova (2002) wee ued. Fuue value of he govenmen defici have been obained by he Euopean commiion Foeca and by Globalinigh up o 2005. A cenaio of gadual educion of govenmen defici wa employed fo he emaining yea. The aio of M2 o GDP i pojeced o gow a he aveage ae of he la fou yea. 4 I alo ied young dependency aio, oal populaion and pe capia income (in PPP em) elaive o he EU-5 aveage. None of hee vaiable uned ou o be ignifican. 9

EPII, Woking Pape No 2004-07 In ode o foeca he ajecoy of deb, I aume ha FDI i he only non-deb ceaing foeign ouce of capial. Theefoe, ne foeign deb evolve accoding o: D D A FDI (5) Whee all he vaiable ae expeed a aio o GDP and FDI i ne FDI flow. In ode o keep coniency wih he eul hown in ecion 4, I deived he deb pah unde hee diffeen aumpion on fuue FDI flow: equal o he 2000-2003 aveage, fixed a 4% of GDP and equal o zeo. The eul ae epoed in figue o 0. Oveall, cuen accoun balance eem o be uainable fo mo of he counie. Exenal deb would inceae only in he vey unealiic cae of ne FDI inflow dopping o zeo. Thi eul i boadly conien wih he Milei-Feei and Razin mehodology ued in Secion 3. I i ineeing o noice he cae of Slovenia: given he eimaed model fo he cuen accoun and he aumpion on gowh and fical policy, exenal deb would dop egadle of he behaviou of FDI. Thi indicae ha highe cuen accoun defici fo hi couny hould no be a poblem. The main implicaion of hi imple imulaion execie i ha widening defici ae a naual poduc of he aniion poce, ha can be een a an idioyncaic poduciviy hock (ee Glick and Rogoff (995) fo he conequence of couny pecific veu wold wide poduciviy hock on he cuen accoun). Theefoe he uual cieia ued o ae uainabiliy ough o be amended in ode o allow fo he peculia iuaion of hee counie. Howeve, he benign oulook decibed by hee imulaion i no exemp fom lage downide ik. Wheea he aumpion of uained gowh fo he nea fuue eem o be highly ealiic, he imulaion e heavily upon he coninuaion of diciplined fical policie, enabling he domeic aving ae no o divege oo much fom he invemen ae. Thi iue i ackled in moe deail in he nex ecion. Moeove, he aumpion of FDI being he only ouce of foeign capial ha doe no ceae deb migh become moe and moe queionable ove ime. The end of he pivaiaion poce i likely o educe FDI inflow, and he developmen of he financial yem will imulae he uge of ohe fom of financing, uch a pofolio invemen o bank loan. If, on he one ide, hey will no conibue o he exenal deb, hey nevehele ae much moe volaile and migh make hee counie much moe expoed o he ik of eveal and balance of paymencii. Finally, he model implicily aume ha he exchange ae egime allow eal mechanim o fully opeae. 20

uen Accoun Dynamic in new EU membe: Suainabiliy and Poliy Iue 5. POLIY ISSUES 5.. Inceaing he aving ae? The popec of lage and poibly widening defici aie almo naually ome queion abou he cuen level of he aving ae and he poible opion o inceae i. Table 0 how he figue fo he counie unde analyi and fo wo Euopean counie: Pougal, a naual benchmak fo he EE, and Gemany. The aveage ove he 993-97 and 998-2002 peiod ae epoed. A eie on peonal aving ae no available fo mo of he new EU membe, hey ae deived by ubacing govenmen budge fom oal aving. I i, admiedly, quie a cude appoximaion, bu i i widely ued in he empiical lieaue (ee Loyaza, e al. (2000)). We can ee ha boh oal and pivae aving ae ae moly in line wih hoe of cuen EU membe, and in many cae hey have inceaed in he econd ub-peiod. Schooen and Sephan (2002) cay ou an economeic analyi of he deeminan of aving in hee counie, uing daa anging fom 990 o 999. They find ha he diving foce ae baically he ame a in ween counie: income level and gowh have a poiive influence, a well a bee iniuion, wheea lowe baie o inenaional boowing lowe aving. Public aving paially cowd ou pivae one. The obviou policy implicaion i ha pomoing gowh will have a beneficial effec on pivae aving. Thi i implicily confimed by he economeic model of ecion 6. oncening govenmen aving, hey could be ued by govenmen a a (limied) inuance again oo wide exenal defici and he elaed ik. A lage uplu o a malle defici would ac a a buffe and pobably inceae make confidence. Of coue one can queion he feaibiliy of even ighe fical policie, ove and above he quie ucceful pogam of fical eain caied ou by EE in ecen yea 5. A poined ou by Sapi e al.(2003) fical conolidaion migh a ome poin clah wih eal convegence age, in ha he oveall poo level of public capial, which i ciical in ode o make long em gowh uainable, need ong invemen effo by he govenmen. oicelli and Ecolani (2002) make a omewha imila agumen: hey find ha almo all he budge defici in new EU membe i ucual. Moeove he expendiue fo invemen i much highe han in exiing EU membe. Thi hould wan again he applicaion o hee counie of he Maaich defici ieia a hey migh ik hampeing he developmen of badly needed infaucue, and aie, accoding o he auho, he iue of he elevance of he golden ule. 5 An ecen expoiion of he ae of public finance in EE can be found in Euopean ommiion (2002) Deailed decipion of fical policie can be found in in Pufield (2003) 2

EPII, Woking Pape No 2004-07 5.2. Ealy adopion of he Euo: i i wie? Anohe obviou implicaion i ha EE counie will need ubanial capial inflow, in a peiod in which ome had deciion abou he choice of he exchange ae egime will be aken. A he ame ime abiding o he acqui communauaie implie he complee capping of he yem of capial conol ome counie ill have in place. Recen epiode of cii how ha full capial accoun libealiaion, lage cuen accoun defici and he wong exchange ae egime can ceae a lehal mix leading o painful financial cii. oncening EE, i i known ha full EMU membehip will be aained a ome poin: he mo peing poblem heefoe elae o he ineim peiod. The whole iue boil down o a ingle queion. Which egime hould be adoped befoe he adopion he Euo? 6 Thee i a lively ongoing debae on hi ubjec. Hioical expeience ha hown ha inemediae egime ae oo dangeou. The choice emain beween he wo pola oppoie: a fixed exchange ae (in he fom of had peg, cuency boad o cuency ubiuion) o a fully flexible egime, poibly backed by a cedible inflaion ageing mechanim. Almo all he debae ha been cened on he conequence of he maked eal appeciaion end hown by hee counie (due o he Balaa Samuelon effec) and how o accommodae i wihin he pemie of he Maaich Teay. Accoding o Begg e al. (200), unilaeal euoiaion would be by fa he fi be opion, fo i would iolae New EU membe fom ubulence in he yea peceding EMU membehip and olving almo auomaically he poblem elaed o lage financial inflow, povided ha he equiemen of a high fical eponibiliy, pice abiliy and a ound banking yem ae me. Howeve, he Maaich Teay appaenly ule ou uch an opion. Thee ohe viable opion ae lef. The fi one i o adop a fixed egime in he hade poible fom, uch a he cuency boad: a cucial peequiie i a ound fical dicipline o keep exenal balance on ack and o dampen he inflaionay effec of he uge in demand emming fom high capial flow. Thi i a highly iky opion, if he egime i no fully cedible, a he cae of Agenina how. A cii would undemine he cedibiliy of he couny moneay auhoiie, delaying EMU eny fo a long peiod. The econd opion i o adop wha hey call a Biih yle floa, baically a full-fledged flexible exchange ae, hen move o ERM-II and finally adop he Euo. Thi would le he woking of eal convegence opeae moohly, while a he ame ime minimiing he ik of financial cii 7. The hid opion, bough fowad by Poland, i o mainain a fully flexible exchange ae egime unil eal convegence ha aken place and he exchange ae vi-à-vi he Euo i a i equilibium value and hen join diecly EMU. 6 A dicuion of whehe he exchange ae egime pelled ou in he Maaich Teay i uiable fo new EU membe i clealy beyond he cope of hi pape. 7 Povided obviouly ha he ERM-II peiod i no oo long. 22

uen Accoun Dynamic in new EU membe: Suainabiliy and Poliy Iue Buie and Gafe (2002) have a moe oupoken yle and ugge ha he cuen eay hould be amended in ode o allow EE o euoie a a negoiaed paiy a oon a poible. Moeove, a he Balaa-Samuelon effec would geneae inflaion ae well above cuen EMU membe one once he exchange ae i fixed, diffeen (and omehow looe) inflaion cieia hould be enviaged fo new EU membe. Howeve, hee udie eem o concenae ovely on he pue Balaa-Samuelon effec, and ovelook he impac of he maive capial flow EE ae eceiving. apial caciy in hee counie anlae ino a high maginal poduciviy of capial, which nomally aac foeign capial. Moneay auhoiie ae faced wih a dilemma: if hey e nominal ae in ode o have eal ae mioing he high poduciviy, foeign capial will pou ino he economie, leading o a lage defici 8 and an appeciaing eal exchange ae. On he conay, if moneay auhoiie y o dampen hee flow by mean of inee ae much below he maginal poduciviy of capial, hey ae likely o depe pivae aving. The following gap wih epec o invemen would anlae ino a cuen accoun defici 9. apial caciy being financed by foeign invemen i a eal phenomenon. I ode of magniude i likely o be quie high elaive o he obeved capial flow wihin cuen EU membe, given ha he diffeence in economic ucue beween new EU membe and cuen EU membe i much geae han ha beween iche and pooe EU counie. Moeove, eal convegence would occu egadle of he exchange ae egime choen. If moneay auhoiie aim a keeping a fixed exchange ae egime, hey will y o figh exchange ae appeciaion by eiliing incoming capial flow. The inceae in he upply of domeic cuency will lead o a dop in inee ae, which would depe aving and imulae invemen, leading o a cuen accoun defici. Moeove an inceae in money upply would anlae ino a highe inflaion. Unde a flexible exchange ae egime, he exchange ae appeciaion would ham exenal compeiivene, woening he ade balance and heefoe he cuen accoun. Howeve, he choice of he exchange egime i ciical, even hough, no egime would inulae a capial impoing couny fom he ik of a balance of paymen cii. Wih long laing fixed exchange egime, agen migh end o boow heavily in he foeign cuency, making he co of adjuing he exchange ae vey (in he cae of Agenina unbeaably) high, a devaluaion would enail maive defaul and poibly, banking cii. Moeove, eing he paiy level in an envionmen of appeciaing eal exchange ae i vey difficul. Moeove wih uch a egime, any educion of exenal 8 How lage i a difficul queion. Fenandez de odoba and Kehoe (2000) calibae a Real Buine ycle model on Spanih daa in ode o gauge he effec of EU eny on capial flow, obaining value fo he cuen accoun defici which fa in exce of he obeved one. 9 Lipchiz e al. (2002) peen a imila agumen in a moe fomalied way. 23

EPII, Woking Pape No 2004-07 imbalance would have o be made by educing pice and wage o by compeing domeic demand. All hi opion ae pobably no vey viable an meaningful. Such a igidiy would pobably inceae he ik of balance of paymen cii. A flexible exchange ae would ac a a paial diincenive o have big foeign exchange open poiion, making he yem a a whole le vulneable. In hi cae howeve he mimaching of bank ae and liabiliy can become izeable, and big wing in he exchange ae can caue elevan poblem of non-pefoming loan. Given ha no egime i fee fom poenially eiou dawback, he qualiy of he financial yem in new EU membe play a ciical ole. alvo and Mihkin (2003) ague ha in ode o have ucceful macoeconomic policie in emeging economie, he developmen of good fical, financial and moneay iniuion i even moe impoan han he choice of he exchange ae egime. Thei agumen i ha, a hown by almo all he ecen example of exchange ae cii, weak iniuion amplify he effec of exenal hock, a in he cae of he banking cii occued in Aia in 997, o gealy educe he poibiliy of economic auhoiy o eac o exenal hock. The ecen uvey on he ubjec (fo example Euopean Foecaing Newok (2004) and he egula epo poduced by he Euopean ommiion and he Euopean Bank fo Reconucion and Developmen), how ha he adequacy of financial iniuion i quie divee. Given he peed of he aniion, i i vey likely ha new EU membe will ill have elevan exenal imbalance even afe hey ene o he Euo. Moeove, a emphaied by Blanchad and Giavazzi (2003), he ingle cuency, by educing anacion co and he cuency ik, i likely o delive a moe efficien allocaion of aving and invemen aco counie, poibly widening he exenal imbalance accoding o he diffeence in capial ineniy and gowh popec. The obeved inceaed vaiance beween cuen accoun poiion in EU membe i cied a evidence of hi poce. They conclude ha hi i a naual phenomenon and ha benign neglec i he mo appopiae fom of policy epone. Howeve, hei concluion i pobably oo opimiic: a widening defici migh alo oiginae o a le han opimal ineempoal allocaion of eouce which could anlae ino a peien lowdown in long em gowh, exacebaing he defici poblem. 6. ONLUSIONS The objecive of hi pape wa o analye new EU membe exenal balance, in ode o hed ome ligh abou hei fuue pepecive and hei medium un uainabiliy. The eimae given hould be aken wih cauion a hey deive fom highly ylied model of he economie. The main concluion ha can be dawn ae he following: - While ome counie ae howing lage exenal defici, no couny eem o have unuainable poiion, accoding o andad accouning mehod. Long em olvency on exenal deb eem o be aued given he bigh gowh popec. Howeve, he mehodology employed uffe fom eveal dawback, and i eul 24

uen Accoun Dynamic in new EU membe: Suainabiliy and Poliy Iue mu be aken wih cauion. I mu be bone in mind ha he key hypohei ha he obeved value of he deb i aken a he uainable one i fa fom innocuou. I i pobably quie heoic if applied o counie uch a Bulgaia, Lavia and Hungay, whoe exenal deb i ahe high, by inenaional andad. A he ame ime i i eaonable o aume ha ohe counie (Slovenia, fo example) could inceae hei exenal deb wihou pejudice o hei financial abiliy. - Howeve, duing he caching up poce imbalance ae likely o widen fo a while. Thi i o ome exen a naual oucome of convegence, bu given he abence of any eicion on capial flow and he leon dawn fom ecen balance of paymen cii, cuen accoun defici mu me caefully monioed. In paicula, i i fundamenal o conide whehe he main diving foce i he dynamic of aving o invemen. On he aving ide, fical policy could play an impoan ole, avoiding oo big budge defici, even hough he ak i no a all imple given he need of public invemen hee counie have. - Anohe eenial challenge fo hi counie i o guaanee ha exenal defici coninue o be financed by elaively ue ouce uch a FDI. Thi will conibue o keep exenal deb o manageable level. A pivaiaion have ended o ae cloe o he end in mo of he couny, micoeconomic efom ecuing he inee of foeign inveo ae eenial. - Howeve, i i likely ha ove ime FDI will be eplaced by moe volaile ouce of flow. Thi would neceiae a ong aenion o he ae of he financial yem. - oncening he acceion o EMU, he elevan ize of exenal imbalance (and heefoe of he capial inflow financing i) hould be aken ino accoun in he deign of he aniion pah leading o he adopion of he euo. A enaive concluion i ha counie ill having flexible exchange ae hould mainain hem a long a convegence ha (among he ohe hing) educed he ize of he defici. Thi mu be complemened by ong and cedible commimen o keep inflaion in check and o an impovemen in financial iniuion in ode o have moneay policie anmied o he eal eco in he mo poweful way. Adoping a fixed exchange ae ageemen and chooing he wong paiy would hif he buden of he adjumen o domeic demand, being devaluaion impoible (in he cae of euoiaion) o exemely difficul o painful, in he cae of pegged ae o cuency boad and given he ong degee of wage and pice igidiy 20. The coecion of imbalance would hen enail compeion in demand o a maked educion in nominal wage. On he ohe hand, counie aleady having vaiou fom of fixed exchange ae aangemen would find hifing o a flexible exchange ae, oo coly, in em of ubulence in he financial yem. Thei economic auhoiie will have o pu even moe aenion in checking cuen accoun imbalance, uing demand policie, and a he ame 20 In a ecen udy Edwad and Levy Yeyai (2003) how ha he advee impac of em of ade hock on gowh i much milde fo counie having floaing exchange ae. Fo a ecen dicuion of he poible em of ade effec following acceion ee Bchi e al. (2003) 25

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EPII, Woking Pape No 2004-07 DATA APPENDIX Vaiable uen Accoun Govenmen defici Money and quai Money (M2) Populaion Foeign diec invemen GDP Invemen Souce IFS IFS, AMEO IFS,WDI AMEO IFS, EBRD AMEO AMEO AMEO: Euopean ommiion Annual Macoeconomic Daabae, available a hp://euopa.eu.in/comm/economy_finance/indicao/annual_maco_economic_daabae/ ameco_en.hm EBRD: Euopean Bank fo Reconucion and Developmen, Taniion Repo, vaiou iue IFS: Inenaional Moneay Fund, Inenaional Financial Saiic Mach 2004 WDI: Wold Bank Wold Developmen Indicao, 2003 Ediion 30

uen Accoun Dynamic in new EU membe: Suainabiliy and Poliy Iue APPENDIX A: SHORT AND LONG RUN DETERMINANTS OF THE URRENT AOUNT The vaiable ha accoding o andad economic heoy ae likely o affec he cuen accoun ae diffeen in em of ime and co-couny vaiaion. Fo example he old dependency aio evolve vey lowly, bu in pinciple may be diffeen aco couny. The ame applie o exenal deb. Ne oupu gowh, on he conay i likely o be highly vaiable ove ime bu o be le o if compaed aco couny, a he economie unde examinaion ae oughly in he ame age of economic developmen. Uing lowly changing vaiable in panel egeion along wih moe volaile vaiable migh eul in he fome hoving a low ignificance. To ovecome hi poblem Aleina e. al (999) popoe a wo ep eimaion. In he fi ep he dependen vaiable i egeed on moe volaile egeion uing andad fixed effec mehod. In he econd ep he co ecion of he eimaed fixed effec i egeed on le volaile vaiable. In hi pape a lighly modified appoach ha been adoped. Fi of all he explanaoy vaiable ae divided ino wo ube, accoding o whehe hei vaiance aco ime (wihin) i highe o lowe han he vaiance aco uni (beween). The fome ae moe likely o affec he cuen accoun in he ho medium em he lae o have a long un effec. Table A how he vaiance decompoiion fo he explanaoy vaiable conideed. Theefoe, and in accodance wih he heoeical model, I employed he budge balance, (wo anfomaion of) ne oupu and he M2 o GDP aio fo he eimaion of he hoem egeion. The pecificaion fo he fi ep egeion i a paial adjumen model A A α βx ω ' (A) i Whee X i he e of explanaoy vaiable. I i well known (Nickell, 98) ha eimaing by OLS a model conaining a lagged dependen vaiable and fixed effec would yield biaed eimao. Moeove, given he mall ize of he ample, ohe mehod uch a Inumenal Vaiable o GMM wee infeaible. Theefoe, in ode o ge ome gauge of he long em componen of he cuen accoun which i no explained by he vaiable conained in X he ample aveage of he eidual of (A) wa aken, and ued a a o of couny fixed effec in he econd ep co ecion egeion whee he peiod aveage of he old dependency aio and of he exenal deb o GDP aio wee ued a independen vaiable. Ohe vaiable uch a oal populaion, young dependency aio o elaive income in PPP wee ued, bu hey uned ou o be non-ignifican. 3

EPII, Woking Pape No 2004-07 Table A: vaiance decompoiion (in % poin) Beween Wihin Govenmen Balance 43.59 56.4 Ne Oupu 37.8 62.9 M2 ogdp 30.86 69.4 Exenal Deb 56.36 43.64 Old Dependency Raio 60.98 39.02 APPENDIX B: A SIMPLE INTERTEMPORAL MODEL WITH HABIT FORMATION AND LIQUIDITY ONSTRAINTS onide a mall open economy facing a fixed wold inee ae and populaed by a coninuum of conume of uni ize. Oupu i exogenou. Thee ae wo ype of conume. A facion ha no acce o he cedi make and heefoe conume i dipoable income: hee ae labelled Non Ricadian conume. The ohe (-) Ricadian conume behave like in he andad ineempoal model, bu hei choice ae influenced by habi fomaion). Uiliy doe no depend ju on peen conumpion, bu alo on aggegae pa one. Aggegae conumpion i heefoe given by NR R ( ) (B) Fo non-ricadian conume, pe capia conumpion i imply he diffeence beween oupu invemen and axe (aumed o be lump um), alway pe capia NR Y I T (B2) In ode o obain a cloed fom oluion fo he conumpion funcion, a quadaic peiod uiliy funcion i aumed. Ricadian conume chooe he pah of pe capia conumpion olving 32

uen Accoun Dynamic in new EU membe: Suainabiliy and Poliy Iue 33 R R D D E Max 2 2 ϕ β (B3). R D (B4) R I T Y F F (B5) Whee F define conume ne foeign ae poiion in pe capia em. onide he Ricadian conume. Solve (B4) fo R, plu i ino (B3) and maximize wih epec o F, obaining he following Eule Equaion [ ] R R E (B6) Ieae (B5) and impoe he non bubble condiion in ode o ge he ineempoal budge conain d R I T Y E F E (B7) I can be ewien, uing (B) and olving (B4) fo R R NR I T Y E F D E ) ( Reaanging R NR I T Y E F D E ) ( he hid em in he igh hand ide of he equaion can be ewien, uing (B2) and he budge conain (B7) T I Y E F I T Y E

EPII, Woking Pape No 2004-07 34 Recalling (B4) we have [ ] R T I Y E F E ) ( Plug in he Eule equaion (B6)and and olve fo R, o obain he educed fom equaion fo Ricadian agen conumpion R I T Y E F (B7) The equaion fo aggegae po capia conumpion i obained uing (B), (B2) e (B7) I T Y E F T I Y (B8) Thi coepond o equaion (0) in he main ex Nex, conide he Govenmen budge conain G G G T B B (B9) whee all vaiable ae in pe capia em. Ieaion and he impoiion of he uual no bubble condiion yield G T E B G E (B0) adding on boh ide I Y E, defining he pemanen value of a geneic vaiable X a X X, and uing he definiion of ne oupu a I G Y NO we ge [ ] [ ] G B NO E I T Y E (B)

uen Accoun Dynamic in new EU membe: Suainabiliy and Poliy Iue 35 The cuen accoun i defined a he diffeence in he accumulaion of foeign ae; i i equal o he diffeence beween he um of ne oupu and income fom foeign ae and pivae conumpion. i I G Y B B B A now eplace by (B8) ue he definiion of pemanen value, and eaange [ ] I T Y E F T G I Y B A add and ubac G, ue he definiion of ne oupu and eaange [ ] I T Y E F G T NO B A ue (B) o eplace he la em in he lef hand ide g B NO E F NO G T B A (B2) now conide he pe capia ock of foeign ae, which i he um of govenmen and pivae ae. A Ricadian conume can hold ae, we have G F B B (B3) ue i o eliminae govenmen bond in (B2), hen add and ubac NO F B NO E NO NO G T B A conide he em in quae backe: add and ubac NO F B NO E NO NO NO! by definiion of cuen accoun we have A B NO F A B NO E NO NO A

EPII, Woking Pape No 2004-07 eplace B uing (B2). The equaion fo he cuen accoun, eaanged i now G ( ) A F T B G A NO ( ) ( NO E NO ) (B4) which i equaion (2) in he main ex. 36

uen Accoun Dynamic in new EU membe: Suainabiliy and Poliy Iue Table 994--996 997-999 2000-2002 zech Republic Invemen 30.90 29.7 27.45 Saving 26.98 25.24 2.60 uen Accoun -3.93-3.93-5.85 Hungay Invemen 20.53 23.26 23.36 Saving 4.4 9.45 20.36 uen Accoun -6.39-3.8-2.99 Poland Invemen 9.0 24.70 2.32 Saving 8.89 9.23 7.03 uen Accoun -0.2-5.46-4.29 Slovak Republic Invemen 28.04 33.59 30.9 Saving 27.30 25.97 22.95 uen Accoun -0.73-7.62-7.24 Slovenia Invemen 2.32 25.2 24.6 Saving 22.45 23.57 23.83 uen Accoun.3 -.55-0.32 Eonia Invemen 26.46 27.52 26.80 Saving 9.54 8.82 8.73 uen Accoun -6.93-8.70-8.07 Lihuania Invemen 22.34 23.56 20.43 Saving 5.8 2.39 5.37 uen Accoun -7.6 -.7-5.06 Lavia Invemen 6.3 23.74 26.6 Saving 6.00 4.9 8.56 uen Accoun -0.3-8.83-8.05 Bulgaia Invemen 4.9 3.04 7.36 Saving 4.07 2.49.99 uen Accoun -0.2-0.56-5.37 Romania Invemen 2.54 9.02 20.83 Saving 6.93 3.47 6.60 uen Accoun -4.6-5.54-4.22 Souce: Euopean ommiion AMEO Daabae, Auho alculaion Table : Saving, invemen and cuen accoun o GDP aio, hee yea non ovelapping aveage 37

EPII, Woking Pape No 2004-07 Exenal deb Real inee Real exchange Real GDP Ne FDI o o GDP Raio ae ae end gowh ae GDP aio Bulgaia 76.6 5.4-7.2 5.2 5.6 zech Republic 37. 4.4-4.4 3.8 3.7 Eonia 63.7 4.9-4.4 5.5 9.0 Hungay 66.5 4.2-3.5 3.3 5.3 Lavia 73.7 8.7-4.2 6. 6.5 Lihuania 44.4 8.0-4.0 6.2 6.0 Poland 40.8.0-4.0 4.4 6.4 Romania 3. 6. -6.8 5. 3.9 Slovakia 55.3 6.6-3.5 4.8 5.7 Slovenia 36.2 6.4-4.4 3.5 6.2 Table 2: Suainable cuen accoun calculaion uing he Milei-Feei Razin mehod. Aumpion No FDI Sable FDI Baeline Aveage (2000-2002) Bulgaia -5.7-9.7 -.3-5.5 zech Republic -.9-5.9-5.6-5.5 Eonia -2.4-6.4 -.4-8.0 Hungay -2.9-6.9-8.2-3.0 Lavia -5.0-9.0 -.4-5. Lihuania -2.5-6.5-8.5-8. Poland -4.3-8.3-0.7-4.3 Romania -2.4-6.4-6.4-4.3 Slovakia -2.9-6.9-8.6-7.0 Slovenia -2.7-6.7-8.8-0.4 Table 3: Suainable cuen accoun calculaion uing he Milei-Feei Razin mehod. Reul. 38

uen Accoun Dynamic in new EU membe: Suainabiliy and Poliy Iue 998 999 2000 200 2002 zech Republic 5.86 2.47 7.78 7.52 NA Hungay 0.46.9.75 6.38 -.94 Poland.4-0.5 3.89 2.90 NA Slovak Republic -7.44 -.2 0.4 NA NA Slovenia 0.87-3.07-2.45 3.35 6.4 Eonia 7.40.06 4.86 4.72 NA Lavia -4.5-3.0.7-6.75-0.80 Lihuania 0.87-4.2-0.69.05 3.62 Bulgaia 3.90.07 2.8 0.26 -.6 Romania -2.05-0.73-0.83 -.36.3 Table 4: Diffeence beween cuen accoun and ne FDI flow (in % of GDP) 995-98 999-2002 Bulgaia 93.44 76.7 zech Republic 33.84 4.03 Eonia 23.73 49.75 Lavia 22.3 63.92 Hungay 63.27 6.07 Lihuania 7.64 4.02 Poland 35.62 37.42 Romania 23.4 27.68 Slovak Republic 36.37 59.66 Slovenia 27.33 33.5 Table 5: Exenal Deb o GDP aio 39

EPII, Woking Pape No 2004-07 Dependen Vaiable: uen Accoun o GDP Raio Lagged u. 0,76 Acc 4,00 -a Budge 0,0 Balance -a 3,23 Oupu 0,45 Deviaion -a 5,03 Oupu 0, Gowh -a 2,68 Financial -0,2 Deepening -a -3,62 Rq 0,40. Numbe ob 07 Sample (unbalanced): 990-2003 Table 6: Sho-em deeminan of cuen accoun balance 40

uen Accoun Dynamic in new EU membe: Suainabiliy and Poliy Iue Dependen vaiable: aveage of fi ep egeion eidual Old Dependency Raio -0,2 -a -3,04 Exenal deb o GDP Raio 0,04 -a 2,6 Rq 0,46. Numbe ob 0 Table 7: Long Tem deeminan of cuen accoun balance 4

EPII, Woking Pape No 2004-07 993-997 998-2002 zech Republic Toal Saving 26.9 23.3 Pivae Saving 24. 23.8 Hungay Toal Saving 4. 9.9 Pivae Saving 5.8 23.0 Poland Toal Saving 7. 7.9 Pivae Saving 20.8 20.8 Slovak Republic Toal Saving 26.6 24.2 Pivae Saving 26.6 25.6 Slovenia Toal Saving 22.4 23.8 Pivae Saving 22.4 23.8 Eonia Toal Saving 20.0 9.4 Pivae Saving 25.4 23.3 Lavia Toal Saving 8.8 7.6 Pivae Saving 2. 20.8 Lihuania Toal Saving 4.7 4.0 Pivae Saving 5.4 6.6 Bulgaia Toal Saving.8.7 Pivae Saving 6.6 6.3 Romania Toal Saving 5.8 5.0 Pivae Saving 20.2 8.5 Pougal Toal Saving 20.3 9. Pivae Saving 22.4 8.5 Gemany Toal Saving 2.7 20.7 Pivae Saving 2. 20.2 Table 8: Toal and pivae aving aio 42

uen Accoun Dynamic in new EU membe: Suainabiliy and Poliy Iue Figue 70 68 60 No FDI 64 50 60 No FDI 40 FDI a 4% of GDP 56 30 20 Aveage FDI 52 48 FDI a 4% of GDP Aveage FDI 0 96 97 98 99 00 0 02 03 04 05 06 07 Figue. zech Republic:Exenal Deb o GDP Raio 44 96 97 98 99 00 0 02 03 04 05 06 07 Figue 2. Hungay: Exenal Deb o GDP Raio 60 90 55 80 50 45 40 No FDI Aveage FDI 70 60 No FDI FDI a 4% of GDP 35 FDI a 4% of GDP 50 Aveage FDI 30 40 25 96 97 98 99 00 0 02 03 04 05 06 07 Figue 3. Poland: Exenal Deb o GDP Raio 30 96 97 98 99 00 0 02 03 04 05 06 07 Figue 4. Slovak Republic: Exenal Deb o GDP Raio 44 0 40 36 32 28 FDI a 4% of GDP No FDI Aveage FDI 00 90 80 70 60 No FDI FDI a 4% of GDP Aveage FDI 24 50 20 40 6 96 97 98 99 00 0 02 03 04 05 06 07 Figue 5. Slovenia: Exenal Deb o GDP Raio 30 96 97 98 99 00 0 02 03 04 05 06 07 Figue 6. Eonia: Exenal Deb o GDP Raio 43

EPII, Woking Pape No 2004-07 00 70 90 80 70 60 No FDI FDI a 4% of GDP Aveage FDI 60 50 40 No FDI FDI a 4% of GDP Aveage FDI 50 40 30 20 96 97 98 99 00 0 02 03 04 05 06 07 Figue 7. Lavia: Exenal Deb o GDP Raio 30 20 0 96 97 98 99 00 0 02 03 04 05 06 07 Figue 8 Lihuania:Exenal Deb o GDP Raio 0 44 00 40 No FDI 90 No FDI 80 FDI a 4% of GDP 70 Aveage FDI 60 96 97 98 99 00 0 02 03 04 05 06 07 Figue 9. Bulgaia: Exenal Deb o GDP Raio 36 32 Aveage FDI 28 FDI a 4% of GDP 24 20 96 97 98 99 00 0 02 03 04 05 06 07 Figue 0. Romania: Exenal Deb o GDP Raio 44

uen Accoun Dynamic in new EU membe: Suainabiliy and Poliy Iue LIST OF WORKING PAPERS RELEASED BY EPII 2 No Tile Auho 2004-06 Inceiude adicale e choix du modèle P. Villa 2004-05 Doe Exchange Rae Regime Explain Diffeence in Economic Reul fo Aian ounie? 2004-04 Tade in he Tiad: How Eay i he Acce o Lage Make? 2004-03 Pogamme de avail du EPII pou 2004 2004-02 Technology Diffeence, Iniuion and Economic Gowh: a ondiional ondiional onvegence V. oude & M. Dube L. Fonagné, T. Maye & S. Zignago H. Boulhol 2004-0 oiance e égime d inveiemen P. Villa 2003-22 A New Look a he Feldein-Hoioka Puzzle uing an Inegaed Panel 2003-2 Tade Linkage and Exchange Rae in Aia : The Role of hina 2003-20 Economic Implicaion of Tade Libealizaion Unde he Doha Round 2003-9 Mehodological Tool fo SIA Repo of he EPII Wohop held on 7-8 Novembe 2002 in Buel 2003-8 Ode Flow, Dela Hedging and Exchange Rae Dynamic A.Banejee P. Zanghiei A. Bénay-Quéé & Aminal Lahèche-Révil J. Fancoi, H. Van Meijl, F. Van Tongeen N. Kounezoff B. Rzepkowki 2003-7 Tax compeiion and Foeign Diec Invemen A. Bénay-Quéé, L. Fonagné & A. Lahèche-Révil 2003-6 ommece e anfe de echnologie : le ca compaé de la Tuquie, de l Inde e de la hine F. Lemoine & D. Ünal-Keenci 2003-5 The Empiic of Agglomeaion and Tade K. Head & T. Maye 2003-4 Noional Defined onibuion: A ompaion of he F. Lego 2 Woking pape ae ciculaed fee of chage a fa a ock ae available; hank you o end you eque o EPII, Sylvie Huion, 9, ue Geoge-Piad, 7505 Pai, o by fax : (33) 0 53 68 55 04 o by e-mail Huion@cepii.f. Alo available on: \\www.cepii.f. Woking pape wih * ae ou of pin. They can nevehele be conuled and downloaded fom hi webie. 2 Le documen de avail on diffué gauiemen u demande dan la meue de ock diponible. Meci d adee voe demande au EPII, Sylvie Huion, 9, ue Geoge-Piad, 7505 Pai, ou pa fax : (33) 0 53 68 55 04 ou pa e-mail Huion@cepii.f. Egalemen diponible u : \\www.cepii.f. Le documen de avail compoan * on épuié. Il on ouefoi conulable u le web EPII. 45

EPII, Woking Pape No 2004-07 Fench and Geman Poin Syem 2003-3 How Diffeen i Eaen Euope? Sucue and Deeminan of Locaion hoice by Fench Fim in Eaen and Ween Euope 2003-2 Make Acce Libealiaion in he Doha Round: Scenaio and Aemen 2003- On he Adequacy of Moneay Aangemen in Sub- Sahaian Afica 2003-0 The Impac of EU Enlagemen on Membe Sae : a GE Appoach 2003-09 India and he Wold Economy : Tadiional Specialiaion and Technology Niche 2003-08 Iminaion Among Exchange-Rae Foecae : Evidence fom Suvey Daa 2003-07 Le uency Boad à ave l expéience de l Agenine. Didie & T. Maye L. Fonagné, J.L. Guéin & S. Jean A. Bénay-Quéé & Mayli oupe H. Bchi, L. Fonagné & P. Zanghiei S. hauvin & F. Lemoine M. Beine, A. Bénay-Quéé & H. ola S. hauvin & P. Villa 2003-06 Tade and onvegence : Reviiing Ben-David G. Gaulie 2003-05 Eimaing he Fundamenal Equilibium Exchange- Rae of enal and Eaen Euopean ounie he EMU Enlagemen Pepecive 2003-04 Skill, Technology and Gowh i IT he Key o Succe 2003-03 L inveiemen en TI aux Ea-Uni e dan quelque pay euopéen 2003-02 an Buine and Social Newok Explain he Bode Effec Puzzle? 2003-0 Hypeinflaion and he Reconucion of a Naional Money: Agenina and Bazil, 990-2002 2002-8 Pogamme de avail du EPII pou 2003 2002-7 MIRAGE, a ompuable Geneal Equilibium Model fo Tade Policy Analyi 2002-6 Evoluion démogaphique e maché du avail : de lien complexe e pafoi conadicoie B Ege & A. Lahèche-Revil J. Melka, L. Nayman, S. Signano & N. Mulde G. ee & P.A. Noual P.P. ombe, M. Lafoucade & T. Maye J. Sgad M.H. Bchi, Y. Deceux, J.L. Guéin & S. Jean L. adiou, J. Gene & J.L. Guéin 2002-5 Exchange Rae Regime and Suainable Paiie fo V. oude &. ouhade 46

uen Accoun Dynamic in new EU membe: Suainabiliy and Poliy Iue EE in he Run-up o EMU Membehip 2002-4 When ae Sucual Defici Good Policie? J. haeau 2002-3 Pojecion démogaphique de quelque pay de l Union Euopéenne (Allemagne, Fance, Ialie, Royaume-Uni, Pay-Ba, Suède) R. Sleiman 2002-2 Regional Tade Inegaion in Souhen Afica S. hauvin & G. Gaulie 2002- Demogaphic Evoluion and Unemploymen: an Analyi of Fench Labou Make wih Woke Geneaion J. hâeau, J.L. Guéin & F. Lego 2002-0 Liquidié e paage de la valeu P. Villa 2002-09 Le concep de coû d uage Puy-lay de bien duable M.G. Foggea & P. Villa 2002-08 Mondialiaion e égionaliaion : le ca de induie du exile e de l habillemen M. Fouquin, P. Moand R. Avie G. Minvielle & P. Dumon 2002-07 The Suvival of Inemediae Exchange Rae Regime A. Bénay-Quéé & 2002-06 Penion and Saving in a Moneay Union : An Analyi of apial Flow 2002-05 Bazil and Mexico Manufacuing Pefomance in Inenaional Pepecive, 970-999 2002-04 The Impac of enal Bank Inevenion on Exchange-Rae Foeca Heeogeneiy 2002-04 The Impac of enal Bank Inevenion on Foeca Heeogeneiy 2002-03 Impac économique e ociaux de l élagiemen pou l Union euopéenne e la Fance 2002-02 hina in he Inenaional Segmenaion of Poducion Pocee 2002-0 Illuoy Bode Effec: Diance Mimeauemen Inflae Eimae of Home Bia in Tade 200-22 Pogamme de avail du EPII pou 2002 200-2 oiance économique mondiale : un cénaio de éféence à l hoizon 2030 B. oeué A. Jouen & F. Lego N. Mulde, S. Monou & L. Pee Lope M. Beine, A. Benay-Quéé, E. Dauchy & R. MacDonald M. Beine, A. Benay-Quéé, E. Dauchi & R. MacDonald M.H. Bchi & M. Mauel F. Lemoine & D. Ünal-Keenci K Head & T. Maye N. Kounezoff 47

EPII, Woking Pape No 2004-07 200-20 The Fical Sabilizaion Policy unde EMU An Empiical Aemen 200-9 Diec Foeign Invemen and Poduciviy Gowh in Hungaian Fim, 992-999 200-8 Make Acce Map: A Bilaeal and Diaggegaed Meaue of Make Acce 200-7 Macoeconomic onequence of Penion Refom in Euope: An Inveigaion wih he INGENUE Wold Model 48 A. Kadaeja J. Sgad A. Bouë, L. Fonagné, M. Mimouni & X. Picho Equipe Ingénue 200-6* La poducivié de induie médieanéenne A. hevallie & D. Ünal-Keenci 200-5 Mamoe: A Mulinaional Model L. adiou, S. Dee, S. Guichad, A. Kadaeja, J.P. Laffague & B. Rzepkowki 200-4 The Fench-Geman Poduciviy ompaion Reviied: Ten Yea Afe he Geman Unificaion 200-3* The Naue of Specializaion Mae fo Gowh: An Empiical Inveigaion 200-2 Foum Economique Fanco-Allemand - Deuch- Fanzöiche Wichafpoliiche Foum, Poliical Economy of he Nice Teay: Rebalancing he EU ouncil and he Fuue of Euopean Agiculual Policie, 9 h meeing, Pai, June 26 h 200 L. Nayman & D. Ünal-Keenci I. Benidoun, G. Gaulie & D. Ünal-Keenci 200- Seco Seniiviy o Exchange Rae Flucuaion M. Fouquin, K. Sekka, J. Malek Manou, N. Mulde & L. Nayman 200-0* A Fi Aemen of Envionmen-Relaed Tade Baie 200-09 Inenaional Tade and Rend Shaing in Developed and Developing ounie L. Fonagné, F. von Kichbach & M. Mimouni L. Fonagné & D. Miza 200-08 Economie de la aniion : le doie G. Wild 200-07 Exi Opion fo Agenina wih a Special Focu on Thei Impac on Exenal Tade S. hauvin

uen Accoun Dynamic in new EU membe: Suainabiliy and Poliy Iue 200-06 Effe fonièe, inégaion économique e 'Foeee Euope' 200-05 Foum Économique Fanco-Allemand Deuch- Fanzöiche Wichafpoliiche Foum, The Impac of Eaen Enlagemen on EU-Labou Make and Penion Refom beween Economic and Poliical Poblem, 8 h meeing, Pai, Januay 6 200 200-04 Diciminaion commeciale : une meue à pai de flux bilaéaux 200-03* Heeogeneou Expecaion, uency Opion and he Euo/Dolla Exchange Rae 200-02 Defining onumpion Behavio in a Muli-ouny Model 200-0 Pouvoi pédicif de la volailié implicie dan le pix de opion de change 2000-22 Foum Economique Fanco-Allemand - Deuch- Fanzöiche Wichafpoliiche Foum, Tade Rule and Global Govenance: A long Tem Agenda and The Fuue of Banking in Euope, 7 h meeing, Pai, July 3-4 2000 2000-2 The Wage uve: he Leon of an Eimaion Ove a Panel of ounie 2000-20 A ompuaional Geneal Equilibium Model wih Vinage apial 2000-9 onumpion Habi and Equiy Pemium in he G7 ounie 2000-8 apial Sock and Poduciviy in Fench Tanpo: An Inenaional ompaion 2000-7 Pogamme de avail 200 2000-6 La geion de cie de liquidié inenaionale : logique de faillie, pêeu en denie eo e condiionnalié 49 T. Maye G. Gaulie B. Rzepkowki O. Allai, L. adiou & S. Dée B. Rzepkowki S. Guichad & J.P. Laffague L. adiou, S. Dée & J.P. Laffague O. Allai, L. adiou & S. Dée B. hane Kune & N. Mulde J. Sgad 2000-5 La meue de poecion commeciale naionale A. Bouë 2000-4 The onvegence of Auomobile Pice in he Euopean Union: An Empiical Analyi fo he Peiod 993-999 G. Gaulie & S. Halle 2000-3* Inenaional Tade and Fim Heeogeneiy Unde S. Jean

EPII, Woking Pape No 2004-07 Monopoliic ompeiion 2000-2 Syndome, miacle, modèle polde e aue pécificié néelandaie : quel eneignemen pou l emploi en Fance? 50 S. Jean 2000- FDI and he Opening Up of hina Economy F. Lemoine 2000-0 Big and Small uencie: The Regional onnecion A. Bénay-Quéé & B. oeué 2000-09* Sucual hange in Aia And Gowh Popec Afe he ii 2000-08 The Inenaional Moneay Fund and he Inenaional Financial Achiecue 2000-07 The Effec of Inenaional Tade on Labou-Demand Elaiciie: Ineecoal Mae 2000-06 Foeign Diec Invemen and he Popec fo Tax o-odinaion in Euope 2000-05 Foum Economique Fanco-Allemand - Deuch- Fanzöiche Wichafpoliiche Foum, Economic Gowh in Euope Eneing a New Aea?/The Fi Yea of EMU, 6 h meeing, Bonn, Januay 7-8, 2000 2000-04* The Expecaion of Hong Kong Dolla Devaluaion and hei Deeminan 2000-03 Wha Dove Relaive Wage in Fance? Sucual Decompoiion Analyi in a Geneal Equilibium Famewok, 970-992 2000-02 Le paage de eaie de la épaiion à la capialiaion obligaoie : de imulaion à l aide d une maquee 2000-0* Rappo d acivié 999 999-6 Exchange Rae Saegie in he ompeiion fo Aacing FDI 999-5 Goupe d échange e de éflexion u la apienne. Recueil de compe-endu de éunion (déc. 97- oc. 98)" 999-4 The Impac of Foeign Exchange Inevenion: New Evidence fom FIGARH Eimaion J.. Behélemy & S. hauvin M. Agliea S. Jean A. Bénéy-Quéé, L. Fonagné & A. Lahèche-Révil B. Rzepkowki S. Jean & O. Bonou O. Rougue & P. Villa A. Bénay-Quéé, L. Fonagné & A. Lahèche-Révil D. Pianelli & G. Sokoloff M. Beine, A. Bénay-Quéé &

uen Accoun Dynamic in new EU membe: Suainabiliy and Poliy Iue 999-3 Foum Economique Fanco-Allemand - Deuch- Fanzöiche Wichafpoliiche Foum, Reducion of Woking Time/Eawad Enlagmen of he Euopean Union, 5 h meeing, Pai, July 6-7 999. Lecou 999-2* A Lende of La Reo fo Euope M. Agliea 999-* La diveié de maché du avail en Euope : Quelle conéquence pou l Union Monéaie ; Deuxième paie : Le implicaion macoéconomique de la diveié de maché du avail 999-0* La diveié de maché du avail en Euope : Quelle conéquence pou l Union Monéaie ; Pemièe paie : La diveié de maché du avail dan le pay de l Union Euopéenne 999-09 The Role of Exenal Vaiable in he hinee Economy; Simulaion fom a macoeconomeic model of hina 999-08 Haue echnologie e échelle de qualié : de foe ayméie en Euope 999-07 The Role of apial Accumulion, Adjumen and Sucual hange fo Economic Take-Off: Empiical Evidence fom Afican Gowh Epiode 999-06 Enepie Adjumen and he Role of Bank edi in Ruia: Evidence fom a 420 Fim Qualiaive Suvey 999-05 enal and Eaen Euopean ounie in he Inenaional Diviion of Labou in Euope 999-04 Foum Economique Fanco-Allemand Economic Policy oodinaion 4 h meeing, Bonn, Januay - 2 999 999-03 Model of Exchange Rae Expecaion: Heeogeneou Evidence Fom Panel Daa 999-02 Foum Economique Fanco-Allemand Labou Make & Tax Policy in he EMU 999-0 Pogamme de avail 999 L. adiou, S. Guichad & M. Mauel L. adiou & S. Guichad S. Dee L. Fonagné, M. Feudenbeg & D. Ünal-Keenci J.. Behélemy & L. Södeling S. Bana, M. Mauel & J. Sgad M. Feudenbeg & F. Lemoine A. Bénay-Quéé, S. Laibeau & R. MacDonald 5

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